Through the first three quarters of 2018, we have witnessed each of the following headlines in the financial markets:
- The Dow Jones Has Biggest Single-Day Loss (February 8th)
- Current Bull Market Longest Running in History (August 22nd)
- Dow Jones Breaks Out of Longest Correction (i.e., decline) Since 1961 (August 27th)
- The Dow Jones Hits its All-Time High (October 3rd)
- The Global Market Bloodbath is Raging on – And There’s Nowhere to Hide (as recent as October 11th)
And that does not even address other important considerations affecting the market, such as interest rate policies, yield curves, economic data, and more.
Volatility is back in a big way, especially when compared to the robust returns and low volatility we saw in 2017.
So what is an investor to do? Well, the answer will be different for everyone, but perhaps the two most effective investment strategies will be to Diversify and Re-Allocate.
1) Diversify your portfolio
Historically when we look at the three major asset classes – stocks, bonds, and cash – we see a theme for each class.
Stocks tend to offer the highest risk and reward, bonds tend to offer more stability and current income, and cash has the lowest risk and return (a return which is often negative once inflation is taken into account).
The mix of stocks, bonds, and cash that is suitable for each investor depends on a number of factors including their age and their tolerance for risk.
A common practice advisors and clients will walk through involves evaluating a proposed allocation against how it performed in atypical historical scenarios such as the Global Recession of 2008.
As the thinking goes, if this new allocation can survive a bear like that, or at least mitigate potential loss, then it’s hardy enough to buy into. Diversification is a fundamental step in reducing potential loss.
2) Re-allocate your cash
Another method by which we diversify and allocate our assets is by time horizon or liquidity.
Everyone should strive to establish an emergency fund, and for most of us a good rule of thumb is to build up 3-6 months’ worth of living expenses.
We would call this the “cash allocation.” This will protect your peace of mind, and your standard of living, should you become injured, sick, laid off, or experience one of those income-reducing external events we don’t like to think about.
Yet as we noted earlier, with cash assets (i.e., savings, money markets, and CDs) it is not uncommon to receive interest rates lower than inflation, causing what is referred to as a negative real-return.
For this reason, it is advisable to allocate remaining funds to things like income and growth.
Income assets tend to produce interest that we can use to supplement our living expenses.
Growth assets are important over the long run due to their potential to make our money last – but it is important to balance their risk with cash and income assets to reduce the risk that we need to access these funds at an inopportune time.
Time will tell what the economy and the markets have in store for us, but in an environment where volatility is on the upswing, now may be the time to sit down and review where your portfolio is currently and walk through where it could be under different scenarios.
To speak with an experienced advisor, call Shelly Geweke, Financial Advisor Coordinator, at 503.423.8519.
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Posted by: Todd Micciche
About the Author: Todd Micciche joined Unitus Financial Advisors in December 2015. A financial advisor like his father before him, he is driven by the positive change he helps create in the lives of his clients.
He earned his MBA at Portland State University and has built 14 years of experience helping clients reach their financial goals. He holds various FINRA securities registrations and is currently studying to attain CFP® certification.